Inaction over Woodside demonstrates complexity for Australian funds

Australia’s first-ever shareholder vote on climate change, put to Woodside Petroleum in April, provided superannuation funds with a prime opportunity to support the sustainability principles that many of them have espoused for years. But at this first hurdle, many crashed and burned, prompting the question: how seriously are funds pursuing sustainability through their investments? The Climate Advocacy Fund (CAF), an index vehicle managed by Australian Ethical Investment and backed by The Climate Institute (TCI), proposed an amendment be made to the constitution of Woodside Petroleum so that it was forced to disclose the carbon-price assumptions it used when planning future resources projects.

The Australian Council of Superannuation Investors (ACSI) threw its weight behind the resolution, which was put to Woodside on April 20.

But it stirred only 8.5 per cent of shareholders into action. Among them, 5.6 per cent voted for the constitutional change, while 2.9 per cent abstained.

LGS (Local Government Super), MTAA Super, Cbus and HESTA are the only funds known to have voted for the resolution. Although Cbus, HESTA and LGS are UN PRI signatories, MTAA Super is not but decided to vote for the resolution. Two industry fund giants and UNPRI signatories, AustralianSuper and UniSuper, voted against the resolution.

While Woodside’s largest shareholder, Shell, disclosed its carbon price assumptions to its own shareholders, investors in Woodside failed to join the dots and demand greater visibility of climate risk.

At the Woodside annual general meeting on April 20, the company obliged CAF to canvass support for an amendment to the company’s constitution so that it would be required to disclose these assumptions. It would require the assent of 75 per cent of shareholders.

Alongside HESTA, LGS and MTAA Super, Cbus and UK asset manager F&C also supported the Climate Advocacy Fund’s move. F&C pointed out that peers to Woodside oil, such as ExxonMobil, Royal Dutch-Shell, BP, Total and Statoil had all disclosed their carbon price assumptions and factored them into their capital expenditure modelling.

Before the vote, the Australian Council of Superannuation Investors (ACSI), which is owned by industry funds and has more than $300 billion under advice, recommended that its members support the resolution. It was a rare move for the governance body, and it doubted the resolution would be passed.

Phil Spathis, manager of engagement and strategy, said the unusual ACSI recommendation was made because “subscribers are able to convey to Woodside their desire for additional disclosure to that already provided by the company on the impact of a carbon price on its operations as and when a carbon price becomes effective”.

This was a significant move: ACSI does not generally support pressure for amendments to companies’ constitutions to achieve such specific disclosures. But at Woodside, there is “a case for additional disclosure to be mandated, because of the potential risk [that] climate change regulation poses to the company’s strategy,” Spathis said.

Karina Litvack, head of governance and sustainable investment at F&C Asset Management, communicated the manager’s reasons for supporting the resolution at the vote:

“As the Australian Government debates whether or not to proceed with policies that will place constraints on carbon emissions, F&C considers it essential for large CO2 emitters like Woodside to ensure their business model is resilient in the face of potential escalation in the carbon price.”

For F&C, a clear climate change strategy from Woodside was not enough.

“Although Woodside has disclosed a clear climate change strategy and significant data on its overall emissions, the absence of any carbon price assumption means investors have no clarity over how these data are relevant to core business decision-making.”

Funds have stepped back from ‘strong’ attitudes towards supporting climate change action. Likewise, slight backward steps were taken within measurement and reporting policies relating to funds’ environmental footprints between 2009 and 2010.

This reticence can be seen in some funds’ approach to the Woodside vote. Two industry fund giants, the $37 billion AustralianSuper and $27 billion UniSuper, voted against the resolution, both citing concerns that commercially sensitive information could be released if they pushed for carbon price assumptions from Woodside.

AustralianSuper’s senior manager of investments, Peter Curtis, says the fund was advised by ACSI, funds managers, and another ESG research provider.

“After reviewing the recommendations of all of the above the outcome was that we do not consider a change to the company’s constitution appropriate for the outcome the resolution is seeking, particularly if there is a risk that commercially sensitive information could be released,” he said.

Similarly, UniSuper CEO Terry McCredden said the fund was concerned that Woodside would be disadvantaged if the resolution passed and it was forced to declare commercially sensitive information. This would not be in members’ best financial interests, he said.

“Also, existing accounting standards already require Woodside to report every six months on impairment testing of its assets and would require it to disclose the changed assumptions that led to any impairment,” he said.

Among the funds that voted for the resolution, a general view is the CAF resolution could have been crafted and worded with more skill, but it was still important that shareholders delivered a strong message to Woodside.

The CEO of Cbus, David Atkin, said the fund “thought it was important to send a message both to Woodside and other listed companies about our desire for transparency on carbon and climate change. However, the fact that the resolution ended up being put as a constitutional change made it highly unlikely that it would be passed, given that a constitutional change requires a 75 per cent majority – especially given that Shell has a major shareholding in Woodside of over 24 per cent.”

HESTA also backed the resolution to tell Woodside that investors believed in carbon reduction. Rob Fowler, executive manager of investments and governance at the fund, says its vote was made in light of public comments by outgoing Woodside CEO Don Voelte, in which he advocated full protection for his sector.

Such protection, said Fowler, “would be at a cost to all other companies and Australian consumers, on the introduction of a carbon tax in Australia”. So HESTA felt that supporting the resolution would “reaffirm to the company” investors’ commitment to initiatives that reduce carbon emissions, and the “need for companies to show that they are constructively managing the associated risks posed to long-term investment returns of our members”.

MTAA Super, one of the foundation members of ACSI, usually votes in accordance with the organisation so supported the Woodside resolution. But the fund also agreed that greater visibility of carbon risk would better inform its investment strategy. “As an investor it was deemed desirable to convey to Woodside a preference for greater disclosure of Woodside’s modeling and expectations relating to the future impact of a carbon price on its business,” said deputy CEO Leanne Turner.

To justify its vote in support of the resolution, LGS took the commercial sensitivity motive and turned it on its head. Bill Hartnett, sustainability manager at the fund, said that if the Woodside’s board “does not consider carbon pricing to be important enough to be part of its base case for making investment decisions, then these carbon pricing assumptions cannot be considered to be commercially sensitive”.

“So they should disclose them. If they are commercially sensitive, then they should be in the base case.”

This disclosure would not necessarily mislead the market – as the Woodside board argued – but would reveal the carbon-price assumptions it used when deciding to go ahead with projects such as Browse Basin, Pluto and the Sunrise oil fields, says Craig Turnbull, CIO at LGS.